Friday, July 31, 2015

This erosion of opportunities to complete life's stages and core dramas is rarely recognized, much less addressed.

The idea that human life subdivides rather naturally into stages is based on our natural progression from childhood into adulthood and eventual (if we're lucky) old age.

Confucian thought views life as a developmental process with seven stages, each roughly corresponding to a decade: childhood, young adulthood (16-30), age of independence (30-39), age of mental independence (40-49), age of spiritual maturity (50-59), age of acceptance (60-69), and age of unification (70 - end of life).

Each stage has various tasks, goals and duties, which establish the foundation for the next stage.

Each stage is centered on a core human challenge: for the teenager, establishing an identity and life that is independent of parents; for the young adult, finding a mate and establishing a career; for the middle-aged, navigating the challenges of raising children and establishing some measure of financial security; for those in late middle-age, helping offspring reach independent adulthood and caring for aging parents; early old age, seeking fulfillment now that life's primary duties have been accomplished and managing one's health; and old age, the passage of accepting mortality and the loss of vitality.

The End of Secure Work and the diminishing returns of financialization are disrupting these core human challenges and frustrating those who are unable to proceed to the next stage of life:

1. Teenagers are being pressured to focus their lives on achieving a conventional financial success (see "Training for Discontent" in From Left Field) that is becoming harder to achieve.

2. Young adults without secure full-time careers cannot afford marriage or children, so they extend the self-absorption of late adolescence into middle age.

3. The middle-aged are finding financial security elusive or out of reach as they struggle to fund their young adult children, aging parents and their own retirement.

4. Increasing longevity is pressuring the late-middle-aged's stage of fulfillment, as elderly parents may require care even as their children reach their own retirement (65-70).

The financial pressures generated by the demise of financialization and the End of Secure Work are not just disrupting each stage; they are upending essential financial balances between the young, the middle-aged and the old.

The elderly, protected by generous social welfare benefits paid by current taxpayers, also benefit from the soaring value of assets such as real estate and stocks. Meanwhile, financialization's asset bubbles have pushed housing beyond the reach of most young people.

Downsizing, lay-offs, low-paying replacement work and poor decisions to buy houses near the peak of the prior bubble have left many of the middle-aged with high fixed costs and a stagnant or increasingly insecure income.

The stresses of trying to make enough money to afford what was once assumed to be a birthright--a "middle class" lifestyle--is taking a heavy toll on the mental and physical health of the middle-aged, leaving many of them too tired for any fulfilling activities and easy prey for destructive self-medication.

This erosion of opportunities to complete life's stages and core dramas is rarely recognized, much less addressed. We are constantly bombarded with messages to innovate, keep up, be fulfilled, etc.--essentially impossible demands for those with multiple generational and/or business duties.

The most workable and productive response to these financial disruptions is to focus not on what's scarce and fraught with intense competition (the top 5% slots of conventional financial security) but on what's still abundant, which is opportunities outside conventional hierarchies, ways of reducing fixed costs and life-skills that happen to be entrepreneurial, adaptive and fulfilling.

When I talk about the Mobile Creative class in Get a Job & Build a Real Career, I'm not talking about a finance-centric definition of success or a path to join the top 5% in Corporate America and the government. The herd is chasing those dwindling slots, too, guaranteeing frustration and failure for the 95% who won't secure one of those slots.

What we're really discussing is a way of living that places a premium on independent thinking, maintaining very low fixed costs, establishing a healthy honesty with oneself and one's associates and customers, the ability to make realistic assessments of oneself, one's successes, failures and errors, and a focus on challenges, opportunities, risks, adaptability, flexibility and experimentation, all with a goal of building one's own human, social and material capital--the foundations not just of well-being but of any meaningful measure of wealth.

This essay was drawn from Musings Report 20. The Musings Reports are emailed weekly to subscribers and major contributors ($50+/year).

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Thursday, July 30, 2015

Can markets be saved an eighth time, a ninth time, a tenth time this year? How about next year?

What do we make of a stock market that's been "saved" seven times in a mere seven months? Saved from what, you ask? Saved from rolling over, of course; after six years of upside, the current uptrend is getting long in tooth, and evidence of global recession is mounting.

The problem for bulls is they keep hitting their head on the ceiling after every "save": instead of running to new highs in an extension of the six-year uptrend, the S&P 500 reverses once it reaches the narrow band of recent highs.

As soon as the SPX hits this range, somebody starts selling. It's called distribution: the smart money sells to whomever is buying--bot, trader, hedge fund, it doesn't matter, as long as someone takes the shares off their hands.

This raises the question: how many more "saves" can there be? How many more times can Greece be "saved" so global markets rally? How many more times can China's imploding stock market be "saved," bailing out global markets again? How many more times can the Fed talk up zero interest rates and put off an eventual click up in rates?

Are there an unlimited number of "saves" in the system? Will we wake up one morning in July of 2016 to find the market has been "saved" a 17th time, or a 20th time? can markets bounce once a month on some absurd "save" of a broken system essentially forever?

History isn't especially kind to the faith that the market can be "saved" every month for years on end. China's authorities and stock market punters are learning this the hard way: when the sentiment has turned, every "save" gets sold by the smart money, and then by the "dumb" (i.e. margined) money as their hopes of new highs are shredded once again.

Can markets be saved an eighth time, a ninth time, a tenth time this year? How about next year? Another 12 months, another 12 saves? If the "saves" are going to run out, why wait to be the last sucker holding the bag when the Fed's fetid hot air fails to work its magic?

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Wednesday, July 29, 2015

Devaluation has a negative consequence few mention: the cost of imports skyrockets.

When stagnation grabs exporting nations by the throat, the universal solution offered is devalue your currency to boost exports. As a currency loses purchasing power relative to the currencies of trading partners, exported goods and services become cheaper to those buying the products with competing currencies.

For example, a few years ago, before Japanese authorities moved to devalue the yen, the U.S. dollar bought 78 yen. Now it buys 123 yen--an astonishing 57% increase.

Devaluation is a bonanza for exporters' bottom lines. Back in late 2012, when a Japanese corporation sold a product in the U.S. for $1, the company received 78 yen when the sale was reported in yen.

Now the same sale of $1 reaps 123 yen. Same product, same price in dollars, but a 57% increase in revenues when stated in yen.

No wonder depreciation is widely viewed as the magic panacea for stagnant revenues and profits. There's just one tiny little problem with devaluation, which we'll cover in a moment.

One exporter's depreciation becomes an immediate problem for other exporters: when Japan devalued its currency, the yen, its products became cheaper to those buying Japanese goods with U.S. dollars, Chinese yuan, euros, etc.

That negatively impacts other exporters selling into the same markets--for example, South Korea.

To remain competitive, South Korea would have to devalue its currency, the won. This is known as competitive devaluation, a.k.a. currency war. As a result of currency wars, the advantages of devaluation are often temporary.

But as correspondent Mark G. recently observed, devaluation has a negative consequence few mention: the cost of imports skyrockets. When imports are essential, such as energy and food, the benefits of devaluation (boosting exports) may well be considerably less than the pain caused by rising import costs.

Japan is a case in point. The massive devaluation of the yen was designed to boost Japan's exports and rocket-launch corporate profits, which was then supposed to drive a virtuous cycle of higher wages and increased employment.

But the benefits of the massive devaluation have been underwhelming. Some exporters have seen profits soar, helping to push Japan's stock market to post-1990 highs, but the effect is not universally positive.

Consider the plight of companies that must buy soybeans from the U.S. to make their food products. The cost of their raw materials just increased 50%, as a $1 of soybeans now costs 123 yen rather than 78 yen.

Given that major exporters of goods and services like China and Japan are importers of oil and food, devaluation is a ticking time bomb in terms of the cost of liquid fuels and food. The looming global recession and overinvestment in commodity production--driven by the zero-interest rate policies of the central banks--has created a temporary glut in oil and other commodities.

But as marginal producers are driven into bankruptcy or cut production, supply and demand will realign at some point. Somewhere not that far down the line, exporting nations that devalued their currency for the crack-cocaine hit of soaring revenues and profits in their home currencies will find the cost of essential imports will skyrocket while the benefits of their devaluation fade in the currency wars they instigated.

Authorities pushing currency devaluation as a cure for their stagnating economies might want to study Frederic Bastiat's insight into the eventual cost and consequences: "For it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa.”

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Improvements in productivity and efficiency can't be stopped, and those employed making buggy whips and collecting horse manure from fetid streets will have to move on to other employment.

This raises an obvious question few dare ask: does this inevitable process of creative destruction include the state? If not, why not? Aren't the state and the central bank the ultimate monopolies begging to be disrupted for the benefit of all? If government is inefficient and unproductive, shouldn't it be "creatively destroyed" in the same fashion as private enterprise?

The obvious answer is yes. Why should a monopoly (government) remain untouched by new knowledge and competition as it skims the cream from society to fund its own monopolies and grants one monopoly/cartel privilege after another to its private-sector cronies?

Under the tender care of the state, we now have uncompetitive, inefficient parastic cartels dominating higher education, national defense, healthcare insurance, pharmaceuticals and hospitals-- to name but a few of the major industries that are now state-enforced cartels thanks to the heavy hand of the state (i.e. regulatory capture).

Under the tender mercies of the state, prosecutors have a 90% conviction rate thanks to rigged forensic evidence, threats of life imprisonment (better to plea-bargain than risk years in America's gulag) and other strong-arm tactics that presume guilt, not innocence. We have the best judicial system that money can buy, meaning you're jail-bait if you can't put your hands on a couple hundred thousand for legal defense and the all-important media campaign.

No wonder "we're number one" in false convictions, innocent people rotting away in the drug gulag and overcrowded prisons. The citizenry are fish in a barrel for overzealous prosecutors and "get tough on drugs" politicos.

And for goodness sake, don't get caught with cash--you must be a drug lord!Only drug lords have more than $200 cash on them at any one time. Once again, the state monopoly on force reckons you're guilty until proven innocent--and in cases where your cash and car were "legally stolen" (a.k.a. civil forfeiture) by the state, that will cost you months or years and tens of thousands in legal fees to get your property back--unless you're targeted for further investigation.

As I have described here in detail, the state can empty your bank account on the barest suspicion that you might owe more taxes than you paid. Due process and rule of law have been replaced with legalized looting and harassment by government in America.

As for using your rights to uncover whatever illegal spying and dirty tricks the state imposed on you in years past--good luck getting a Freedom of Information claim processed. The state's organs of security are busy targeting suspected terrorists with drone strikes, and your trivial concerns about constitutional rights don't count.

In fact, why exactly are you asking? Your inquiry is highly suspicious.

If there is a difference between the U.S. national security state and the Stasi, it is merely technological. We don't have to depend on snitches; we got high-tech tools, pilgrim.

There are two systems under our state: one for insiders and one for the rest of us. Insiders get a free pass, everyone else gets the state's boot on their neck. If you're Hillary Clinton, rules are for the little people who haven't managed to skim tens of millions in bribes ( a.k.a. speaking fees and campaign contributions).

There is no financial crime that can't be turned into a heroic expression of America's greatness--if you can afford the bribes.

Here's how bad it is: let's say you're a senior U.S. senator whose husband is the penultimate crony insider worth hundreds of millions of dollars. This is a power couple to be reckoned with, wielding state and private-wealth power.

So what did the national security state say when the senator asked for minimal factual reports on agency activities? Blow chow, honey.

The lady in question is senior U.S. senator Dianne Feinstein, who is married to investment banker/financier Richard Blum. Interestingly, Feinstein had carried the national security state's water for years in the senate, defending our Stasi/KGB from inquiry or even the dimmest light of media exposure.

Hey, America's Stasi: you guys really know how to reward your water carriers.

Here's my question: when do we get to exercise democracy and fire every factotum, apparatchik, toady and lackey in the state who has abused his/her authority, trampled on our constitutional rights, participated in civil forfeiture, threatened innocent citizens, looted the system for personal gain and committed malfeasance? It's called accountability and rule of law, people.

If you can't fire your Stasi, KGB, corrupt prosecutors, greedy cops and parasitic politicos, then you don't have a real democracy, you just have a phony facsimile of democracy, an empty shell that's up held up as propaganda to a skeptical world.

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Sunday, July 26, 2015

Panicked by the possibility of declines that undermine the official narrative that all is well, authorities the world over are purchasing assets like stocks, bonds and mortgages directly. Central banks are explicitly taking on the role of buyers of last resort on the theory that if they place a bid under the market to arrest any decline, private buyers will re-enter the market once they detect that the risk of a drop has dissipated.

The idea is that once private buyers flood back into the market, central banks can unload the assets they bought to stem the panic. In this view, the market is not based on fundamentals such as revenues, profits and price-earnings ratios--it's all about confidence. If central banks restore confidence by reversing any drop with massive buying, this central-planning manipulation will restore the confidence of private investors.

When this restoration of confidence has been accomplished, private buyers will happily buy the central banks' stocks, bonds and mortgages. The central banks' portfolios of assets will shrink and the central banks will once again have "dry powder" to buy assets the next time markets falter.

This sounds reasonable in the abstract, but it doesn't work in the New Normal economy central banks have created. Let's consider a simple example to see why.

Let's start by recalling that prices are set on the margin, i.e. the last view shares, bonds or homes bought/sold. In a neighborhood of 100 houses, the price of each home is based on the last few sales which become the comparables appraisers use to establish the fair market value of all the nearby properties.

As the risk-on investment mindset switches to risk-off, house prices start declining. If the last home sold for $400,000, the next seller will expect at least $400,000. But since the mood has changed and risk has re-emerged, buyers are suddenly scarce. Homes listed for $400,000 don't sell. Eventually a house sells for $350,000 because the seller just needed to get out.

Suddenly, the value of the other 99 homes is in question. Home prices are sticky, meaning sellers refuse to believe the value of their home has declined. So listings of homes asking $399,000 pile up while potential buyers are wondering if $350,000 is a bit rich and perhaps $340,000 is the "real value."

Then two houses sell for $325,000. Maybe it was a divorce, or a transfer to another state. For whatever reason, the sellers needed out.

As few as 5 home sales revalues the entire neighborhood. Price is set on the margin.

As prices plummet, authorities decide to prop up valuations by directly buying homes. The next five homes are bought by authorities at full asking price.

The authorities expect new private buyers to come in and buy the next batch of homes, but the bubble-mindset of prices are only going up has switched to the fear-mindset of let's wait, prices are falling--and one of us might lose our jobs.

Now the authorities are trapped by their policy of central planning distortion of price discovery: since sellers sense prices are being manipulated (or the news that authorities are buying houses to prop up the market leaked out), they don't trust the price accurately reflects market valuations.

Pretty soon, authorities own 20 houses. Private buyers have vanished, and sellers are realizing it might be their last best chance to sell for $325,000, because if authorities stop buying homes, the price could revert to pre-bubble valuations--at $250,000 or even less.

At $325,000, the homes are poor investments for investors. With property taxes and junk fees soaring while rents are stagnating as layoffs increase, there is no way to make money buying a house for $325,000 once appreciation is no longer a sure thing.

The moment authorities stop buying, the price of the next house sold will be substantially lower as prices re-set to historical norms. This repricing to $250,000 saddles the authorities with immense losses, as they now own 25% of all the homes bought at $325,000 each.

By propping up the price, the authorities have injected false information into the market, and as a result, nobody can trust that current prices are real. If the price of the home might drop $50,000 next year when authorities finally stop buying, why buy now?

With prices distorted and trust lost, where can private investors put their money? Certainly not into houses that might drop in value once authorities cease being buyers of last resort.

In effect, central planning asset purchases aimed at propping up prices destroy the essential price discovery needed by private investors. With authorities buying assets, investors have no place to put their money that isn't exposed to sudden policy changes by authorities.

In system language, the markets are now tightly bound to central planning policies: any change in policy has an immediate and potentially disastrous effect on the values of assets.

This is why buying assets to prop up prices is a one-way street: once you distort markets to prop up prices, you destroy information, independent price discovery and trust-- all the essentials of a market.

What authorities have created is a facsimile of a market. It looks like a market on the surface, but only gamblers and fools risk capital in markets based on false information.

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Friday, July 24, 2015

The Central Planners who thought that buying shares to prop up the stock bubble was an excellent fix are about to find out the true meaning of toil and trouble.

The actual line from Shakespeare's Macbeth is double, double, toil and trouble, fire burn, and cauldron bubble but for the purposes of analyzing what happens when authorities prop up market bubbles by directly buying assets, bubble, bubble, toil and trouble is also appropriate.

China's authorities seem to have chanted Shakespeare's magical incantation nonstop this year, as the Shenzhen and other Chinese stock market indices have more than doubled. This chart illustrates what the Chinese authorities were aiming for: a bubble that just keeps expanding and never pops:

But what actually happened was predictable: China's stock bubble burst. In response, Chinese authorities threw everything within reach into the market to stem the decline: criminalizing negative comments about stocks, loosening credit, enablinggreater fools to post their homes as collateral for margin accounts, and the last and chillingly irreversible tool in the Central Planning Bubble Inflation Tool Kit, direct purchases of stocks: China Spends 10% Of GDP On "All Bark, No Bite" Stock Bailout:

In gambling parlance, Chinese authorities doubled-down on their bet (there's your double, double) that they could save their bubble, bubble.

The problem is that double, double leads to bubble, bubble which leads to double trouble, because once you start down the path of buying assets to prop up bubbly markets, there is no exit.

As Sartre noted in No Exit, Hell is other people, which in the case of China's imploding stock bubble includes all the banana vendors who are now itching to sell Centrally Planned rallies to get their borrowed money off the table before the ball drops into a slot on the roulette wheel and they lose everything.

Having accepted the poisoned chalice of buyer of last resort, Central Planners have no choice but to buy every share sold by every banana vendor who wants out.

In other markets, the sellers might be hedge funds, private equity funds, pension funds or insurance companies. But the dynamic of private sellers realizing it's time to get out while the getting's good is the same in all post-bubble markets.

That leaves Central Planners in a world of toil and trouble that is much like a financial Roach Motel--you can go in but you can't get out. The Central Planning fantasy is that after buying a huge chunk of the market to stabilize the bubble, private buyers will rush back in, allowing Central Planners to distribute (sell) their shares to the credulous banana vendors, pension funds, towns in Norway still sitting on the mortgage-backed securities they bought in the previous bubble, etc.

This fantasy overlooks human psychology. A bubble is not just financial; it is a bubble of euphoria, confidence and greed. Once that bubble pops and is replaced by caution and fear, people want out--not just fickle banana vendors but professional asset managers.

Central Planners have taken on an impossible task once they become the buyer of last resort: they have to keep buying to prop up valuations, but the pool ofgreater fools willing to take the inflated shares off the central planners is shrinking.

The Central Planners can keep the market cauldron bubbling by buying assets hand over fist, but once they lower the fire of their buying, the bubbling stops and the market crashes.

The Central Planners who thought that buying shares to prop up the stock bubble was an excellent fix are about to find out the true meaning of toil and trouble.Double, double, bubble, bubble, double trouble. The magical incantation isn't about saving markets, it's about destroying them.

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